With Greece nestling in the Euro zone, the EU Euro summiteers yesterday tried to give the impression that there would be gifts for the Greeks to save them within the zone. There was no detail, however. It was all spin and mood music, no deals, no loans with conditions, nothing save stern words on how Greece would at last control her deficit. France and Germany know words are cheap. They were full of comfort and strength, but they did not sign any cheques. Nor should they.
The truth is many European countries have borrowed too much and are still borrowing too much. If country which is weak financially has to go to the aid of another country which is even weaker, you do not end up with two strong countries, but with two weak ones. The danger in a weakened Euro zone is that if one country needs a big bail out, it may start to drag down others and in turn undermine the whole system.
The bizarre thing in the whole debate is how many people just assert that cutting public spending by 10% is too much, too cruel, impossible. Given the enormous waste and inefficiency of European public sectors, cutting by 10% is technically very easy. If they really do believe in solidarity all they need do is cut all the salaries, other than the lowest paid, by 10% and put on a staff freeze: the costs will come roaring down. It is high time the public sector joined the reality that parts of the private sector has had to endure for a couple of years. There is no way out of a debt crisis other than curbing spending and repaying some debt. The longer they delay the inevitable, the worse the crisis will be.
Greece is today in the front line of the battle between the markets and overspending governments. Tomorrow it could move on to include Portugal, Spain, even the UK. The markets will want to extract higher interest rates from governments that borrow too much. THey will want to force a change of conduct they believe in. Just as governments were all too ready to preach to banks and the private sector about the perils of borrowing too much, so markets are now in a mood to do the same back to governments.
February 12, 2010
On the way to the office today someone said that Mr Brown was non-committal on whether or not we would have to support Greece. I would urge Mr Brown to back Greece to the hilt, commit to every scrap of help the EU wants us to give. Of course, with the proviso that if the UK ever needs help all the other EU countries will come and bail us out.
I fear our economy is in worse shape than many across the channel. Also, our cupboard is already bare, our government can’t offer more than moral support to Greece as socialist brothers-in-arms.
As far as waste in the public sector, it’s self evident to anyone who has even the most superficial dealings with the public sector that waste and reproduction are rampant, we should even have a Ministry of Waste such a large proportion of spending does it encompass – I fear it’s budget would be as large as that of the NHS!
February 12, 2010
On TV yesterday Gordon Brown was asked if the UK would have to contribute to the Greek bailout – if there is one. He said it was a matter for the something zone. He slurred the word so that you couldn’t tell whether it was EU or Euro zone. Here we go………
February 12, 2010
I had a chuckle to myself at the site of Gordon giving advice to a high spending socialist government with a bloated public sector and 12% borrowings! What could he possibly say?
February 12, 2010
Why does Parliament need to spend an extra £6m to set up the IPSA – surely this is yet another example of Whitehall and Westminster being profligate with taxpayers' money. I fail to see why yet another Quango is needed when was actually required was the level of transparency provided by the Welsh or Scotish Assemblies on claims by their memebrs and for the Fees Office to rigorously apply the rules in accordance with the practices and policies that HMRC expect for all private sector organisations. This is not difficult so why are MPs allowing this waste of taxpayers' money.
Its time for Paliament to set an example rather than create yet another job creation scheme.
February 12, 2010
I'm sure it could be done for 10% of the money in the private sector. I saw they thought they needed three press officers, who presumably will spend their days writing expenses stories for the Daily Telegraph, and a three person policy unit (aren't they simply following policy already laid down?).
Indeed, why not ask for bids to supply the service?
February 12, 2010
Its all commonsense really.
You are living beyond your means, you owe money.
So do you not try to pay it off as quickly as possible, either by reducing your own expenditure on peripheral things, or by working harder to earn more money if that is possible.
The other option I suppose is to photocopy some bank notes, and try and pass them off as being real. Problem with this is if you are caught, you may then get sent to jail where you earn no real money, your debts then get worse, and then you have lost your house.
February 12, 2010
Cutting public spending should, indeed, be easy. But why does it prove so contentious? Because every public sector job that is cut is potentially a vote lost. Thus during recessions, private sector unemployment increases more quickly than in the public sector. More people fall into welfare, and the proportion of wealth taken by the state increases. When the economy recovers, foolish politicians say they want to “share the proceeds of growth,” or somesuch. With plenty of tax income to play with, there is no need, it seems, to cut back public spending. Thus, public sector spending ratchets upwards inexorably through economic cycles. In 1997, public spending as a percentage of GDP was below 40%; now, it is heading above 50%.
The only thing that can put a stop to it is a government radical and brave enough to describe the sheer immorality of an ever-expanding state, and that can articulate the principles of liberty, justice and inalienable property rights that are the foundation of peace and prosperity for all. Where might we find such a government? Ummmm…….
February 12, 2010
Spurious comparisons are sometimes made by Brown & Co of the UK with the US and Japan + other European countries, on the relative level of debt. No doubt this will come again. Conservatives should remind anyone in such discussions that: 1) UK declared debt is mis-leading as Brown has hidden debt off balance sheet 2) The relevant comparison is the level of debt taken together with the total share of the state in the economy. After all, the US and Japan have much smaller government / GDP and tax / GDP ratios than we do. Under Labour the share of the state in Britain has rocketed (and competitiveness has accordingly fallen). The US & Japan could in theory solve their budget & debt problems by imposing similar levels of taxation – eg a fuel tax or VAT in the US. They choose not to do so which is up to them, but we should remember the UK is now taxed to the hilt & there is no way out of our borrowing crisis other than cutting spending.
February 12, 2010
The USA has a Sales Tax which is similar in concept to VAT
February 13, 2010
True but indirect taxes are much lower. Point stands – US & UK debt are not comparable since overall Govt/GDP in US is smaller
February 12, 2010
A quote that seems to sum up the socialist mentality.
"We thought, because we had power, we had wisdom."
Stephen Vincent Benét
February 12, 2010
So far this has all the hallmarks of an EU fudge. Does Germany really want to be the guarantor for Greece, Spain, Portugal…? Why are so many politicians continually trying to pretend that they can put off the taking of the essential medicine with out which the patient will have to enter intensive care to prevent expiration? Why can't they see that the longer they leave it the worse it becomes?
February 12, 2010
They can see that the longer they leave it, the worse it becomes for someone else. Simples.
February 12, 2010
It has an air of ERM days but this time it's The EU economic model in the firing line. As a lesson the crisis should remind this organisation that something, one day, will fracture their federal dreams. This is only money, so far. The very essence of "peace", trotted out to justify an EU state/dictatorship will one day be guns not cash.
February 12, 2010
You raise a number of very interesting points, not only for the Euro and Greece but for us as well.
There is another interesting issue, which we do not have to deal with directly, but one that will affect us as well as the Euro zone and that is will the markets test the strength of monitory union. I commented yesterday that I felt yesterday’s meeting was a key point in testing the political (and public) strength of political and monitory union. The answer appears to be that the Germans will support it, but only up to a point, and they will not back it with funds.
Angela Merkel is probably aware that if she agrees to a direct bailout of Greece it will end her political career and could increase scepticism of the EU in German. The question will now be who blinks first. If the markets put more pressure on Greek bonds then will Angela Merkel blink and supply funds or will Greece call in the IMF, effectively bypassing the EU.
What happens if the Unions strike again in Greece and the government slow down their plan to cut the deficit, what will the EU and markets do and will Greece be able to survive in the Euro if this happens.
This will affect the UK in the short term due to exchange rate movements. In the long term it will certainly affect our relationship with Europe as it may end the whole EU project or it may give it a new lease of life.
Yesterday the unasked question was, where is Europe going, union or individual states. The answer that came back was neither. How long will that answer be able to survive events, only time will tell.
February 12, 2010
All this is not going to end happily, especially in the UK. It is as though the government has been laying land mines for the last few years, now has to retrace its steps, but has forgotten where it put them.
February 12, 2010
I am not an economist and I am greatly puzzled. It is stated that Greece is in crisis and that this crisis is based upon Greek debt. The crisis is such that it could bring the Euro down and then what would happen. Greece would default on its debts.
Meanwhile, back in the UK, the Labour Government is following a policy of creating ever greater debt and will continue this until the economic situation improves. The question is will the economic situation improve before we follow the Greeks into economic meltdown due to our ever increasing debt mountain?
One could say that what is happening in Greece (and possibly Italy, Spain and Ireland) is a lesson for us all but our Government is blind.
February 12, 2010
German banks are massively exposed, its a game of chicken between the PIGS and the banks. The Germans will force the Greeks to cut, if the system comes down then we know what happens from the last time…..
February 12, 2010
Article 122 of the Lisbon Treaty
1. Without prejudice to any other procedures provided for in the Treaties, the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States,
upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy.
2. Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the Member State concerned. …
I'm sure that Angela Merkel takes the view that Greece's problems are self-inflicted, not "exceptional occurrences beyond its control", and thus no bailout is due. Perhaps the Greeks will now apply to the G20 for funds, putting us on risk.
The Irish have already shown that an austerity budget can be implemented – indeed their willingness to do that and not to waste government funding on trying to prop up their property market (average asking prices have fallen from €352,000 to just €242,000 since the peak according to daft.ie – implying even bigger falls in transacted prices) means that they are ahead of the curve, albeit they still have a long way to go.
I wonder if there might be some traction for a "Department of Deregulation" in Brussels soon, to allow countries to cut the cost of doing things the Brussels way. Staff would be drafted in from other departments, with no new recruitment. According to Lisbon, we wouldn't need a new treaty agreement to set it up. It is not just the monetary system that needs attention in the EU.
I get the impression that markets are attempting to deal with the problems in serial fashion. They fear provoking contagion by attacking on too many fronts at once. There is a hope that tackling Greece alone may serve "pour encourager les autres". Once Greece has been collateralised to the maximum (what price the Parthenon?), then they will move on to the next victim.
February 12, 2010
But the following three articles prohibit bailouts, and back in the 1990's it was those provisions which were emphasised by the euro-enthusiasts.
"British taxpayers ending up burdened with the debts of other countries?
Just scaremongering nonsense; it could never happen, because articles such-and-such of the Maastricht Treaty would not allow it."
I even remember letters from pro-euro MPs being printed in national newspapers, saying exactly that.
February 12, 2010
Might help if the rich Greeks esp shipowners paid a bit of tax.Peter Mandelson actually said he was intensely relaxed about the filthy rich as long as they paid their tax.Money is apparently pouring out of Greece into Cypriot banks,The magic of the markets:the sequel,leaving poor public sector workers to take the hit.They'd be fools to carry the can.
February 12, 2010
Absolutely agree – a 10% cut is the very least the public sector must endure, in both the UK and Greece.
Gordon wanted to build a large public sector because that meant more votes for Labour, now he's screwed us all because it's going to be difficult to get enough of a majority to trim back the over spending, waste and debt.
It's not just boom and bust, it looking like it might be a busted-bust.
February 12, 2010
During the wars between the countries of the former Yugoslavia, the Greek government was gasping to side with Serbia in its murderous abmitions. Perhaps they should now take their begging bowl to Serbia?
February 12, 2010
JR, I think you are being too optimistic about the apparently more financially rigorous approach of France and Germany and by implication the ECB. I have just been reading an article by an Austrian economist called Philipp Bagus who is an associate professor at Universidad Rey Juan Carlos in Madrid.
In it he says,' Today the question is, will Greece be bailed out by the rest of the countries? The officials of the weaker countries tend to emphasize the solidarity of the union, while the stronger countries make it clear that there will be no bailout.
Yet, the whole debate is misleading: Greece is already being bailed out by the rest of the union. The European Central Bank (ECB) accepts Greek government bonds as collateral for their lending operations. European banks may buy Greek government bonds (now paying a premium in comparison to German bonds of more than 3%) and use these bonds to get a loan from the ECB at 1% interest — a highly profitable deal.'
The ECB is, in fact, creating new euros by accepting Greek government bonds as collateral. Greek debts are monetized, and the Greek government spends the new money it receives from the sale of its bonds to the ECB via other european banks. This is QE.
In other words, the ECB is debasing the Euro currency in the same way as the Bank of England is here. But I can't help feeling that the ECB is playing a much more dangerous game.
February 12, 2010
That had not occured to me, but it seems to be a very intelligent point.
February 12, 2010
John , that is part of it – also one has to really quetsion whether alot of the 'services' provided are both essential or justified and you could cut another 10% plus without hitting vital aand commonly agreed necessary frontline services.
February 12, 2010
It's very easy to say cut public workers salaries, it even seems as a whole that they may deserve it.
When you get closer there are individuals involved. You live to your means and you may not have enough tolerance in your finances to cope with a drop in salary not while the price of essentials appears to be shooting up (energy, petrol food).
So when a pay cut is muted you fight against it. Public sector workers are generally safer in their jobs than most private workers so you should not be surprised to find they fight harder.
In addition those who work in the public sector are witness to such monumental waste of public money carried out on the orders of senior managers that to be told they must pay for the mistakes of civil service overlords produces real anger.
Senior managers who waste money on personal whims, hundreds of thousands of pounds of equipment that is bought without proper specification and never works, thousands spent to install second flagpoles at every council building because a coalition council argued over which flag to fly, thousands of pounds of furniture thrown away because there is no internal system to redistribute it, perfectly usable computer system replace because the 3 year cycle takes no account of usability, 3rd part companies paid to remove old computers because EU regulations prevent them being sold to staff, EU procurement laws increasing bureaucracy and red tape without bringing down costs, in winter heating is turned so low staff are working in jackets and gloves but in summer windows are nailed shut so fans have to be bought.
Some examples from only 2 local authorities I have contact with.
There would be no need for pay cuts if the biblical levels of waste were reduced.
February 13, 2010
In the context of biblical levels of waste – how can the UK have roughly the same size civil service as the US federal government which has to support roughly five times the population (308m vs 62m)?
However, the reality is that the civil service makes up around 20% of the working population and is funded by borrowing, commerce taxation and taxes on the other 80% which is the private sector.
The private sector has been declining through redundancy and bankruptcy/sell-offs and globalisation over that last couple of years. From HMRC data for 2007/8 to 2009/10 income tax receipts alone have fallen by 10% while corporation tax fell by over 30%. In the same period the public sector has increased in size and cost. This is not sustainable and must be reduced, not just by 10% but significantly which must involve cutting jobs not just pay or costs. Privatising roles and departments to change the cost from payroll to contract won't work, it doesn't reduce the cost enough.
Cutting out wastage is simply not enough, the public sector has become excessively bloated well beyond our means to pay for it. Redunacies cannot be avoided, let alone pay cuts, but if I had to roles that should be a core capability between say a communications/marketing director and a teacher I know which role I'd chose to keep.
February 12, 2010
"It is high time the public sector joined the reality that parts of the private sector has had to endure for a couple of year"
Amen to that. Same is true for the UK. The public sector here think they can just live in a fantasy world – they are running out of our money.
February 12, 2010
I have just finished Jeffrey Archer's excellent read about Robert Maxwell and Rupert Murdoch under the title of "The Fourth Estate".
Aren't people silly? Even the topmost ones!
I read history too – look at the way a clown like Adolf Hitler fooled the best and greatest minds of his day. Or Napoleon, for heaven's sake coming back from the dead to fight Waterloo! Or Henry VIII stealing the entire wealth of the Church!
So let us not expect Greece to be a terrible example. We have a right to expect that the rest of the world owes us a living – we're British!
February 12, 2010
Since Ireland has already taken the tough action of 10 (or is it15%) cuts in public sector salaries there would be hell to pay if Greece was given the money.
Ireland might even decide they were better off out, as indeed they would be if they weren't tied by currency into the Euro.
Ireland's real problem is that they are, except for city states Singapore & Hong Kong, the only developed country to have marginally less electricity per unit GNP than Britain & some of that comes from Hunterston nuclear plant in Scotland.
February 12, 2010
Greece and all the other Euro-Zone states should impose recruitment & pay freezes on their public sectors while taking the ax to industrial subsidies & farm funding as well.Over-generous welfare needs curbing.That could fund big cuts in fiscal deficits needed to avert this crisis from getting even worse.In short fiscal conservatism is required to save many EU states from being basket cases for ever more.Governments in Spain,Italy,Portugal,Ireland,Greece and the UK should use this as an opportunity to make government smaller.
The Euro could function better if free-trade was more of a reality owing to lower tariffs & less subsidies coupled with fewer trade restraints.A more dynamic economy that was less suffocated by excess regulation and Big Government could produce real prosperity.That would make for a successful Euro.
In short it needs a Thatcher style policy agenda to rescue the Euro.Talk about comic irony !If Greece had the Thatcher-Tebbit style Union laws then that government could ram through its Irish style public spending & borrowing reductions far easier.
In short the EU needs more economic liberalism not less.
February 12, 2010
I wondered as well if the ECB is happy to let the value of the Euro drift down a bit. It is very high against the US Dollar.
Your point about cutting public sector salaries as opposed to firing people is well made.
February 13, 2010
Let's look closer to home. Cutting UK public expenditure by 10% may be easy but the requirement during the next parliament is to cut it by 20% – and that's taking a rosy view about the growth in tax and revenue receipts (rising to 3% pa from 2011).
So the Conservative Party's strategy must be to implement all of the easy 10% cuts in the first half of the parliament, giving us from 18 months to 2 years years to plan the rest.
February 13, 2010
The truth is many European countries have borrowed too much and are still borrowing too much.
The Greeks should stop Borrowing worthless bits of paper and Print their own.
February 13, 2010
Greece has a history of borrowing too much. Before it was a member of the eurozone, it had to pay higher rates of interest, but after it joined, it was able to borrow money at low rates of interest. The government consequently borrowed more and increased the welfare state and initially the standard of living improved. If they now massively slash the budgets they risk an even deeper recession and possible rioting in the streets.
Surely the EU elite, economists and politicians, anticipated the risks of the “one size fits all” currency? It seems that monetary union is all part of the EU goal towards political union.
February 13, 2010
I wonder if the French and German's aren't planning a sting against speculators. Waiting for Greece to get pushed hard and major bets placed and then dashing them.
Its would appeal to their politics against the capitalist locusts and the Anglo-Saxon speculators.
February 15, 2010
Predatory Lending is a major contributor to the economic turmoil we are currently experiencing.
Here is an example of what I am talking about:
Scott Veerkamp / Predatory Lending (Franklin Township School Board Member.)
Please review this information from U.S. Senator Jeff Merkley regarding deceptive lending practices:
"Steering payments were made to brokers who enticed unsuspecting homeowners into deceptive and expensive mortgages. These secret bonus payments, often called Yield Spread Premiums, turned home mortgages into a SCAM."
The Center for Responsible Lending says YSP "steals equity from struggling families."
1. Scott collected nearly $10,000 on two separate mortgages using YSP and junk fees. 2. This is an average of $5,000 per loan. 3. The median value of the properties was $135,000. 4. Clearly, this type of lending represents a major ripoff for consumers.
http://merkley.senate.gov/newsroom/press/release/…
February 16, 2010
I do believe you've just described deflation, John.
And that's the only way out for the whole world, I think – it's not pretty, but there you are. Trying to inflate away the debt by currency devaluation or whatever just kicks the can down the road.
The point about it not being the wisest idea for already weak countries to bail out weaker ones is well taken – the same applies to forcing healthy(-ish) banks to bail out distressed ones, as we will find out in due course.
April 28, 2010
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